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Where next for the NatWest share price after mixed Q3 results?

The NatWest share price has fallen almost 5% today to 220.45p. But as the bank had already recovered to its pre-pandemic price point, it might simply be returning to its fair valuation.

NatWest (LON: NWG) is the last of the ‘big four’ UK banks to post an update over the past few days. Barclays, HSBC and Lloyds have all reported bumper profits and seen their share prices rise as a result. But the story with NatWest this morning is different. Its share price is down almost 5% to 220.45p as I write.

But this was also its price on 7 February 2020. Then the pandemic-induced stock market mini-crash saw it sink 54% to 101.75p by 3 April. Having slowly recovered over the past year and a half, it hit a 2021 high of 234.30p a few days ago on 26 October. And while its Q3 results are broadly positive, today’s price fall might be a fair correction.

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NatWest share price: Q3 results

In today's results, profit before tax rose to £1.074 billion, more than triple the £355 million recorded in Q3 2020. And income across its UK retail and commercial business operations increased 4.4% by £103 million compared to Q3 2020. This continued strong performance means the bank has been able to buy back £402 million of shares to date.

Like its competitors, NatWest’s profits were boosted by a net impairment release of £242 million. This is money that was set aside during the pandemic to cover loan defaults. Encouragingly, this release means that NatWest is now confident that fewer defaults will occur.

And it’s maintained a high level of capital and strong liquidity. Its CET1 ratio for the quarter was 18.7%, compared to the regulatory requirement of 4.5%. Meanwhile, its liquidity coverage ratio of 166% represents £78.6 billion in headroom above the 100% minimum requirement. Moreover, customer deposits grew by £9.1 billion during the quarter to £476.3 billion. And like its competitors, mortgage lending increased, by £2.5 billion or 3.1% year-to-date. With such strong liquidity, NatWest has the capacity to lend far more as the economic recovery continues.

However, NatWest Markets income decreased 62.5% by £175 million compared to the same quarter last year. The bank blamed the fall on ‘continued weakness in Fixed Income which was impacted by subdued levels of customer activity.’ And Net Interest Margin decreased by 6 basis points to 2.34% quarter-over-quarter.

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Outlook for the future

Overall, NatWest retains the same positive outlook it shared in its Q2 results. One key concern, however, is that the bank no longer expects to achieve its risk-weighted assets reduction target of £20 billion this year.

Meanwhile, ongoing legal problems are a concern. It’s already paid £294 million in legal costs relating to breaches of UK money laundering regulations. The Financial Conduct Authority had accused NatWest of failing to monitor a client’s suspicious deposits totalling £365 million over five years. After pleading guilty earlier this month, the final penalty will be decided in Q4 and is estimated to be around £340 million.

But CEO Alison Rose said that NatWest has ‘continued to deliver a strong operating performance; growing in key areas and accelerating our digital transformation.’ While she accepts that there are ‘challenges in the economy and for our customers – especially around supply chains and the cost of living,’ she believes that ‘growth is good, unemployment is low and there are limited signs of default across our book.’

The NatWest share price is falling because despite increased profits and strong liquidity, its results on some key metrics have left something to be desired. However, it’s still up 88% over the past year, and 19% in the past five years. In this context, the 5% fall today could be a fair correction. And as the economic recovery continues, it might regain that loss soon.

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This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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